Avanti Dilettanti! - Europe on the Brink of Failure

BERLIN - Returning to Europe lately after a six-day trip to the United States, I wondered for the first time while reading the press on the recent Irish crisis whether the euro - and thus the European Union - might possibly fail. This could happen because, in the long run, the EU won't be able to withstand its conflicts of interest and the resulting process of "renationalization" in all member states without suffering grave damage.

At the height of the Irish crisis - mainly a crisis of confidence in banks' stability and the strength and competence of Europe's political leadership - European leaders were publicly at each other's throats. While their stated aim was to save the euro, the government leaders involved did exactly the opposite, producing increased nervousness and volatility in financial markets, which in turn exacerbated Ireland's problems.

Germany made its own contribution to aggravating the crisis by launching a public debate about involving the banks in shouldering losses from 2013 on. Why this discussion had to take place now, in the middle of the Irish crisis, remains Chancellor Angela Merkel's secret. It was most likely prompted solely by domestic political considerations. Indeed, the demand for bank participation is popular in Germany - and justifiably so - unlike the Irish rescue package. But it would be more productive to implement such a policy than to announce it two years in advance.

Wherever you look, the price tag put on Europe these days is calculated in euros and cents and no longer in political and historical currency. Germany, in particular - Europe's largest country, and its strongest in economic terms - seems to have fallen victim to historical amnesia. The idea that Germany's own national interest dictates avoiding anything that isolates the country within Europe, and that the task is therefore to create a "European Germany" rather than a "German Europe," seems to have been abandoned.

To be sure, Germany's leaders still consider themselves to be pro-European and reject such criticism with indignation. But the fundamental change of strategy within Germany's European policy can no longer be overlooked. Objectively, the trend is indeed towards a "German Europe," which will never work.

The failure of the euro - and thus of the EU and its Common Market - would be the biggest pan-European disaster since 1945. That this outcome is possible - despite protestations to the contrary by all involved - reflects the willful ignorance and lack of imagination of Europe's heads of state and government. Otherwise, they would recognize that the financial crisis has long become a political crisis threatening the EU's very existence, and thus that a permanent crisis-resolution mechanism for debt-distressed members, while clearly needed, requires a permanent political crisis-resolution mechanism in order to succeed.

With the status quo it will be hard for the euro to survive. This permanent political crisis mechanism is, however, nothing less than a well-functioning economic union. The alternatives are therefore either forging ahead with real economic union and further EU integration, or regressing to a mere free-trade area and the renationalization of Europe.

The belief that stability can be achieved with technocratic rules, regulations, and sanctioning mechanisms alone in a eurozone whose economies are diverging will prove to be misguided. Genuine eurozone stability presupposes macroeconomic alignment, which in turn requires the political integration of a well-functioning economic union. Staggered alignment of economic and social policies (such as the legal retirement age), new balancing schemes (euro bonds as a transfer instrument), and an effective stability mechanism are all needed to preserve the common currency.

How can these far-reaching aims be achieved within the eurozone (together with non-eurozone EU members that want to join in)? We should probably forget about any treaty changes at the moment.

But the Schengen agreement offers an alternative, namely arrangements between individual states. The abolition of border controls was anything but a minor detail, and yet it was achieved on the basis of intergovernmental agreements. Why not economic union, too?

What the eurozone needs now isn't a repetition of Maastricht, but a kind of Schmidt/Giscard 2.0.This kind of initiative requires the support of Germany and France, because the crisis cannot be resolved without them. Given their economic and political clout, Germany and France are the respective leaders of the eurozone's northern and southern parts. Both could therefore sponsor the indispensable compromise between the eurozone's stronger and weaker countries.

France's role would be to ensure that the weaker countries don't fall victim to enduring deflation. And Germany would have to be the guarantor of stability. Both countries together, however, must inaugurate the step towards economic union, which requires that both governments actually want that.

Merkel will have to explain the inconvenient truth to Germans that the price of having the euro is inevitably a transfer and economic union, and French President Nicolas Sarkozy will have to make clear to the French the price of a real economic and stability union. The political risk for both of them will be anything but small, but the alternative - the failure of the euro - is unacceptable for both countries.

Any eurozone political leader whose primary consideration now is re-election will face certain failure by meeting this historical challenge. But European priorities have to be the primary concern in this crisis - even at the price of losing office. On the other hand, taking this historic initiative would, relative to fainthearted tactical maneuvering, substantially increase politicians' chances of re-election later.

But Europe has no shortage of politicians. What is urgently required now are genuine statesmen and stateswomen.

Copyright: Project Syndicate/Institute of Human Sciences, 2010.
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